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Fiscal position remains on even keel

Now that all the speculation over the annual mini-budget has been replaced by the hard facts of South Africa’s public finances, it seems clear that the prophets of doom have once again been proven wrong.

Whilst it is true that budgeted tax revenues have been placed under pressure because of declines in several key export commodities, a turning point in some of these commodity price cycles may occur at any time, which could still lead to a measure of recovery in the profits of the country’s mining companies.

More importantly, South Africa has a highly diversified economy, with the services sectors now accounting for almost 70% of total value added. In 2022, the mining sector’s contribution to GDP was only 7.3%. Although the primary sectors continue to play an important role in employment and foreign exchange earnings, the bulk of the country’s fiscal revenues emanate from economic activity in the services and manufacturing sectors.

An important issue that has been overlooked in earlier media commentary on the mini-budget is the fact that National Treasury only had verifiable expenditure and revenue data for five months of the current fiscal year. With another long stretch lying ahead, it is useful to remember that SA Revenue Services can look forward to bumper months in November and December, when a combination of high consumer spending during Black Friday, Cyber Monday and the Christmas holidays guarantees high VAT receipts.

When looking at the specific data for the first five months of the fiscal year, the total government expenditure overrun of R73.5 billion has largely been dealt with by the spending cuts announced in the mini-budget. A clear message nevertheless needs to be conveyed to all the national government departments and provincial authorities that further budget overruns will not be tolerated.

Importantly, the primary fiscal balance is still expected to record a surplus from next year onwards and gross public debt is likely to stabilise in the 2025/26 fiscal year, albeit at a marginally higher level. South Africa’s public debt/GDP ratio remains relatively low, compared to most of the country’s key trading partners and several emerging market peers.

The acid test for the evaluation of the mini-budget lies in capital market reaction, especially the exchange rate and the long-term bond yield. The budget team at National Treasury are probably in a celebratory mood today, as the news is encouraging: the rand has recovered from R19.09 a week ago to R18.63 on 2 November – an improvement of 2.5%, whilst the yield on 10-year bonds has dropped by 60 basis points since the beginning of October.

The key to the future strengthening the country’s public finances lies in higher economic growth. Government’s new-found commitment to engage the private sector in all aspects of logistics and energy infrastructure has already lifted the country’s capital expenditure as a ratio of GDP, which provides a platform for higher growth from 2024 onwards.

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